Maharashtra economic survey: Fadnavis' approach to farmer distress should be on 'Don't' list of every state govt

If one looks at the Maharashtra economic survey 2017-18, there are two things that have dragged down the economy and disturbed the state’s finances—a sharp contraction in farm sector growth and the additional borrowing made to fulfil the June, 2017 loan waiver promise. Devendra Fadnavis’ Maharashtra gives us a classic example of how to mess up an economy with poorly thought out, politically motivated populist policies such as farm loan waivers and by adopting an entirely wrong approach to address the looming agrarian crisis in the state.

To begin with, the way Fadnavis approached farmer distress in Maharashtra must go into the ‘don't's’ list of any government serious about the state of its exchequer. It shows how the burden of executing farm loan waivers can shake the finances of even the most industrialised state in the country. A quantum jump in fiscal expenditure and sharp slowdown in economic growth, with no other major reasons to show, characterises Maharashtra’s economy, going by the estimates given in the latest annual economic survey. This should be a message to other state governments and to the union government as well.

File image of Maharashtra chief minister Devendra Fadnavis. PTI

Let’s take a look at where Maharashtra’s finances stand at this point. According to the Economic Survey of Maharashtra 2017-18, the state’s growth declined to 7.3 percent in financial year 2017-18, the weakest in the three years since Fadnavis’s government assumed power. Remember, Maharashtra had logged a 10 percent growth rate in the previous fiscal. In financial year 2015-16, the Fadnavis government had recorded a 7.6 percent growth rate. Revenue expenditure has shot up significantly after the state had to raise an additional Rs 20,000 crore to meet the expenditure for the farm loan waiver. That takes the revenue deficit and fiscal deficit figures way beyond the Rs 4,511 crore and the Rs 38,789 crore estimated at the beginning of the year.

The big shock for the state has come from the agriculture sector, which provides employment for more than half of the state’s population. Growth here is estimated to have slowed to 8.3 percent contraction in 2017-18, the survey showed. Last year, the 10 percent growth in the state’s economy was powered by a 22.5 percent jump in agriculture and allied activities, which was made possible by good monsoons that year. One can blame the rains for poor farm growth but there are larger issues that the economic survey has raised. The share of agriculture and allied activities to the state's net income has been sliding over years.

It fell to 11.9 percent in 2017-18 from 15.3 percent in 2001-02. This points to the fact that even when the farm sector remains as a major employer for the state, employing more than half the population, it is lacking in terms of efficiency and output. This is something that is seen in the national economy as well.

As a share of GDP, the agriculture sector contributed nearly 50 percent at the time of independence but that share has now dropped to 13-14 percent. In the wake of continuous farmer agitations, the Fadnavis government chose to go for the easy way instead of looking at deeper solutions that can provide permanent, sustainable solutions to the state’s farm sector, particularly in the areas of irrigation, technology and reforming the market mechanism. His government went to the town announcing a Rs 34,000 crore farm loan waiver in June, 2017. The implementation of the waiver scheme itself was a mess as discovered by a series of stories Firstpost published, reporting from rural Maharashtra.

Empirical evidence from the past shows that loan waivers have never really helped any farmer beyond offering a temporary relief. It destroys the credit culture (by encouraging even honest borrowers not to pay back) and piling up bad loans on the books of commercial banks. The ill-effects of farm loan waivers are explained in detail in this piece. It is quite evident by now that no government is keen to offer long-term solutions to farmer distress.

To sum up, there are two major reasons for Maharashtra’s growth slowdown and widening fiscal deficit as indicated by the economic survey. One, the economic impact on account of additional borrowing made by the Fadnavis government to fulfil the loan waiver promise that ultimately never benefited anyone beyond winning a political point for Fadnavis himself. Second, a sharp slowdown in growth of farm sector that is a result of wrong or inadequate policies, which failed to look at the actual problem on the ground. What we have seen here is a classic case of how to mess up a healthy economy with political populism and wrong policy approach. That has, unfortunately, come from the most industrialised state in India.